Changes to the operation of defined contribution pension schemes will also impact on AVC arrangements

The Pensions Regulator (tpr) and Government have both recently announced plans to change the way in which defined contribution pension schemes (DC schemes) will operate going forward. Trustees of defined benefit pension schemes (DB schemes) may have breathed a sigh of relief that for once a set of changes had no direct relevance to their own scheme and, as a result, did not create any additional compliance issues. However where a DB scheme offers members additional voluntary contributions (AVCs) on a defined contribution basis, these new developments will impact on the provision of AVCs and trustees will need to review their arrangement to ensure it remains compliant and fit for purpose.    

The main changes which impact on AVC arrangements are:

1. The requirement to produce a Governance Statement that states that the scheme complies with the 31 quality features outlined in the tpr’s Code of Practice 13 and associated regulatory guidance.

Going forward there is a clear need to show that schemes are well managed and delivering value for money for members. Although several of the quality features do not apply to AVC arrangements, the Statement is still required. As many of the quality requirements may be difficult to demonstrate within an AVC arrangement, DB scheme trustees can adopt a proportionate approach in how they deal with the requirement, but will still need to assess how well their scheme currently complies in respect of its AVC arrangement and ensure that a Statement is completed.

2. The introduction of a cap on charges in qualifying defined contribution auto-enrolment schemes of 0.75% from April 2015.

Although this is not directly applicable to AVC arrangements, from a scheme governance perspective it suggests that adopting a policy of regularly testing the market to ensure value for money in the fees being charged for AVC funds is sensible. It is possible that any charge cap could, at some point in the future, be extended to cover all defined contribution schemes which have a default strategy, and this could include AVC arrangements.

3. The widening of retirement options for defined contribution scheme members and the proposed abolition of the need to buy an annuity at retirement from April 2015.

Many members of AVC arrangements already target taking their tax free cash lump sum from their AVC pot (if the scheme rules allow for this) and so may already be invested in cash funds (or funds which are targeted to be invested 100% in cash at retirement). However in light of the increased likelihood that in future members will choose to use their AVCs to provide a cash lump sum rather than secure an annuity, it is suggested that trustees regularly review the funds made available to members and consider whether those funds continue to be appropriate. This is particularly relevant for those members who feel uncomfortable making investment decisions. Trustees should also ensure that the AVC literature issued to members clearly explains all the options available to them at retirement.

4. The Government has proposed a ‘guidance guarantee’ which will provide face to face guidance for defined contribution scheme members at retirement.

It is not yet clear whether this requirement will extend to AVC arrangements, but if it does trustees will need to ensure that members are made aware of the guidance. In the meantime it is recommended that trustees consider more generally the support and information they currently provide by way of pre-retirement and retirement communications to AVC members.

Once established and offered to DB scheme members, AVC arrangements often receive little further attention from either trustees or their advisers. These developments however reflect a change in attitude towards AVC arrangements and act as a timely reminder to trustees of DB schemes to review their AVC arrangement to ensure that it remains fit for purpose in a changing retirement landscape, is well managed and provides good value for money for members.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.